Bloomberg News

Diageo to Pay $2.04 Billion for Control of United Spirits

By George Smith Alexander and Malavika Sharma
November 09, 2012

Bottles of United Spirits Ltd. Antiquity, from left, McDowell's No. 1 DietMate, and McDowell Signature whiskeys are displayed on the shelves of a liquor store in Chandigarh, Punjab. Photographer: Sanjit Das/Bloomberg

Diageo Plc (DGE), the maker of Johnnie
Walker Scotch, will buy a 53.4 percent stake in India’s United
Spirits Ltd. (UNSP) for 111.7 billion rupees ($2.04 billion) to gain
leadership in the world’s largest whiskey-consuming nation.

The U.K. distiller will acquire a 27.4 percent stake at
1,440 rupees per share and will then make an offer for a further
26 percent, the companies said today. They first disclosed that
they were in discussions in September.

United Spirits Chairman Vijay Mallya and others are selling
a 19.3 percent stake in the maker of McDowell’s No. 1 whiskey as
his unprofitable Kingfisher Airlines Ltd. (KAIR) struggles with a cash
shortage. The Indian distiller has a leading 43 percent share of
the country’s whiskey market, which Euromonitor International
estimates will grow by about 50 percent to $31.1 billion in the
five years through 2016.

“It will be a win-win for both,” said Deven Choksey,
managing director at K.R. Choksey Shares & Securities Pvt. in
Mumbai ahead of the announcement. “Diageo will get a foothold
into the company and the Indian market, and the Mallya group
will get the money to pay the debt of Kingfisher.”

Diageo, which already sells its Johnnie Walker whiskey and
Smirnoff vodka brands in India, will benefit from United
Spirits’ distribution network and the company’s experience with
negotiating complex rules that govern India’s liquor business,
according to P. Phani Sekhar, a fund manager with Angel Broking.

Shares Gain

“The liquor business is a very high entry-barrier business
because of the state-level regulations,” he said. “This
business has been cracked by Mr. Mallya over a period of time.”

Diageo is paying about 20 times United Spirits earnings
before interest, taxes, depreciation and amortization in the
period ended March 31, 2012, it said. That compares with a
median of about 17 times for comparable transactions in the last
10 years, according to data compiled by Bloomberg.

“If you look at emerging-market transactions in the
consumer space, this multiple is not out of line,” Diageo Chief
Financial Officer Deirdre Mahlan said on a conference call
today. “There is no doubt that India is one of the most
exciting, if not the most exciting market in Asia. So the
multiple reflects the value we can deliver.”

The price is “high, but it’s not outrageous,” said Trevor Stirling, an analyst at Sanford C. Bernstein in London.

Diageo advanced 0.4 percent to 1,796 pence as of 3:30 p.m.
in London trading. United Spirits’ shares rose 1.3 percent to
1,360.5 rupees at the close of trading in Mumbai, after gaining
as much as 6.1 percent earlier in the day.

Emerging-Market Growth

Diageo is seeking growth in markets outside Europe, as part
of its plan to get half of its net sales from developing markets
by 2015. The distiller is keen to make acquisitions in the Asia-
Pacific region, Gilbert Ghostine (BSETMCG), president for the region, said
in an Oct. 1 interview. The company gets about 14 percent of
sales from Asia-Pacific and is “on track” to raise emerging-
markets revenue to 50 percent from 40 percent, he said then.

“This business has already got very good brands, and it’s
got very good routes to market,” Diageo Chief Executive Officer
Paul Walsh said in a Bloomberg TV interview. “But I do believe
we can step up our expertise in marketing, in innovation and at
the right time we can leverage those routes to markets for our
global brands.”

Diageo had only 0.1 percent of the Indian whiskey market in
2011, behind Pernod Ricard SA’s 15 percent, Euromonitor said.

Diageo Deals

The U.K. company, which is funding the acquisition through
existing cash resources and debt, has no plan to take its
ownership of United Spirits to 100 percent or to integrate the
businesses, Mahlan said on the call. “Given that we are
acquiring a distinct and separate business, there is not a
significant amount of cost synergies,” she said.

Before today’s agreement, Diageo had announced 12 deals
valued at $2.87 billion over the last three years, including
Turkey’s Mey Icki raki brand for about $2.1 billion last year.
Walsh said today he would still like to gain control of tequila
brand Jose Cuervo.

“In the last couple years this company has become much
more acquisitive and people will have to say that that is a good
thing,” said Chris Wickham, an analyst at Oriel Securities.

Over the last three years there were 223 deals announced
globally with wine and spirits companies as targets, according
to data compiled by Bloomberg. The average premium was 23.3
percent, according to that data.

United Spirits today reported second-quarter net income
declined 73 percent to 392.7 million rupees, as the cost of raw
materials increased. Revenue increased 24 percent to 22.2
billion rupees in the three months ended Sept. 30 from a year
earlier, the company said in a statement.

Mallya

Speaking a conference call, Mallya said he wouldn’t comment
on what the United Spirits deal means for Kingfisher Airlines.
The airline’s largest lender this month said that the carrier
should raise at least $1 billion of fresh capital. The airline,
which halted flights in October, is also working on a turnaround
plan as it seeks to persuade regulators to re-activate its
suspended license.

Mallya has an option to sell his remaining shares to Diageo
at the same price for the next seven years, according to the
statement, provided that such a sale wouldn’t trigger Diageo
needing to make a further tender offer for United Spirits.

The United Spirits chairman will hold 14.9 percent of the
company after selling the 19.3 percent stake to Diageo.